Wage Determination in Competitive Labour Markets

• Perfectly competitive labor markets have characteristics such as homogeneous labor, wage takers, perfect knowledge and mobility, and wage maximizers.
• In these markets, the equilibrium wage is determined by the forces of supply and demand, with workers accepting the going market wage.
• However, real-world labor markets are often imperfectly competitive due to differences in skills, negotiation power, imperfect information, and limited labor mobility.

This module discusses how wages are determined in competitive labor markets. It begins by examining the characteristics of perfectly competitive labor markets, including homogeneous labor, workers accepting the market wage, perfect knowledge and mobility, and the objective of wage maximization for workers and profit maximization for employers. In a perfectly competitive labor market, the equilibrium wage is determined by the forces of supply and demand. Workers are wage takers and the quantity of labor employed by individual firms is determined by the intersection of the market wage and the marginal revenue product. However, these characteristics are not entirely realistic in the real world, as labor markets often have heterogeneous workers, negotiation on wages, imperfect information, and limited labor mobility.